Keith Paul Bishop reports:
As the name suggests, reverse veil piercing occurs when a third party outsider is able to reach corporate assets to satisfy claims against an individual shareholder. In an opinion filed yesterday, the Fourth District Court of Appeal held that reverse veil piercing may be applied to a Delaware limited liability company. Curci Investments, LLC v. Baldwin, Cal. Ct. App. Case No. G052764 (Aug. 10, 2017). This may come as a surprise to those familiar with the Fourth District Court of Appeal’s earlier opinion in Postal Instant Press, Inc. v. Kaswa Corp., 162 Cal. App. 4th 1510 (2008):
The reasoning of the cases adopting outside reverse piercing of the corporate veil is flawed, and we join other courts declining to accept it. As we will explain, outside reverse piercing is not a logical extension of the standard alter ego doctrine but instead addresses significantly different concerns. Outside reverse piercing can harm innocent shareholders and corporate creditors, and allow judgment creditors to bypass normal judgment collection procedures. Legal theories (such as agency or respondeat superior) and legal remedies (such as claims for conversion or fraudulent conveyance) adequately protect judgment creditors without the need to distort theories of corporate liability.
Id. at 1513. Notwithstanding the above, the Court of Appeal found that Postal Instant Press was no bar to reverse veil piercing in Curci because Postal Instant Press involved a corporation, not a limited liability company. Standing alone, that isn’t a terribly convincing distinction, however, in light of Corporations Code Section 17703.04(b). Perhaps more convincing was the Court of Appeal’s finding that a creditor of an LLC does not have the same rights as against a shareholder of a corporation because a creditor of a member of an LLC may only obtain a charging order (Corp. Code § 17705.03).
I am, of course, not a fan of LLC veil piercing:
Courts are now routinely applying the corporate law doctrine of veil piercing to limited liability companies. This extension of a seriously flawed doctrine into a new arena is not required by statute and is unsupportable as a matter of policy. The standards by which veil piercing is effected are vague, leaving judges great discretion. The result has been uncertainty and lack of predictability, increasing transaction costs for small businesses. At the same time, however, there is no evidence that veil piercing has been rigorously applied to affect socially beneficial policy outcomes. Judges typically seem to be concerned more with the facts and equities of the specific case at bar than with the implications of personal shareholder liability for society at large.
A standard academic move treats veil piercing as a safety valve allowing courts to address cases in which the externalities associated with limited liability seem excessive. In doing so, veil piercing is called upon to achieve such lofty goals as leading LLC members to optimally internalize risk, while not deterring capital formation and economic growth, while promoting populist notions of economic democracy. The task is untenable. Veil piercing is rare, unprincipled, and arbitrary. Abolishing veil piercing would refocus judicial analysis on the appropriate question - did the defendant - LLC member do anything for which he or she should be held directly liable?
Keywords: corporation, limited liability, limited liability company
Bainbridge, Stephen M., Abolishing LLC Veil Piercing (May 2004). UCLA School of Law, Law-Econ Research Paper No. 04-11. Available at SSRN: https://ssrn.com/abstract=551724
Conversely, if we are going to have veil piercing, I think there are times when reverse veil piercing is okay:
Reverse veil piercing (RVP) is a corporate law doctrine pursuant to which a court disregards the corporation’s separate legal personality, allowing the shareholder to claim benefits otherwise available only to individuals. The thesis of this article is that RVP provides the correct analytical framework for vindicating certain constitutional rights.
Assume that sole proprietors with religious objections to abortion or contraception are protected by the free exercise clause of the First Amendment and the Religious Freedom Restoration Act (RFRA) from being obliged to comply with the government mandate that employers provide employees with health care plans that cover sterilizations, contraceptives and abortion-inducing drugs. Further assume that incorporated employers are not so protected. This article analyzes whether the shareholders of such employers can invoke RVP so as to vindicate their rights.
At least one court has recognized the potential for using RVP in the mandate cases, opining that these cases “pose difficult questions of first impression, including whether it is “possible to ‘pierce the veil’ and disregard the corporate form in this context.” The court further opined that that question, among others, merited “more deliberate investigation.” This article undertakes precisely that investigation.
Invoking RVP in the mandate cases would not be outcome determinative. Instead, it would simply provide a coherent doctrinal framework for determining whether the corporation is so intertwined with the religious beliefs of its shareholders that the corporation should be allowed standing to bring the case. Whatever demerits RVP may have, it provides a better solution than the courts’ current practice of deciding the issue by mere fiat.
Keywords: corporation, limited liability, reverse veil piercing, reverse pierce, veil piercing, free exercise, first amendment, Religious Freedom Restoration Act, RFRA
Bainbridge, Stephen M., Using Reverse Veil Piercing to Vindicate the Free Exercise Rights of Incorporated Employers (March 6, 2013). The Green Bag, Vol. 16, No. 3, Spring 2013; UCLA School of Law, Law-Econ Research Paper No. 13-06. Available at SSRN: https://ssrn.com/abstract=2229414
